Grantham CAPM and Continuous Probability Distribution Presentation

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zbafgre15

Business Finance

Grantham University

Description

Prepare a PowerPoint or Prezi Presentation to define the following terms, using graphs or equations to illustrate your answers where feasible.

  1. Risk in general; stand-alone risk; probability distribution and its relation to risk
  2. Expected rate of return, ^r
  3. Continuous probability distribution
  4. Standard deviation, σ; variance, σ2
  5. Risk aversion; realized rate of return, r
  6. Risk premium for Stock i, RPi; market risk premium, RPM
  7. Capital Asset Pricing Model (CAPM)
  8. Expected return on a portfolio, r^p; market portfolio
  9. Correlation as a concept; correlation coefficient, ρ
  10. Market risk; diversifiable risk; relevant risk
  11. Beta coefficient, b; average stock’s beta
  12. Security Market Line (SML); SML equation
  13. Slope of SML and its relationship to risk aversion
  14. Equilibrium; Efficient Markets Hypothesis (EMH); three forms of EMH
  15. Fama-French three-factor model
  16. Behavioral finance; herding; anchoring

Business School Assignment Instructions

The requirements below must be met for your paper to be accepted and graded:

Write between 750 – 1,250 words (approximately 3 – 5 pages) using Microsoft Word in APA style, see example below.

Use font size 12 and 1” margins.

Include cover page and reference page.

At least 80% of your paper must be original content/writing.

No more than 20% of your content/information may come from references.

Use at least three references from outside the course material; one reference must be from EBSCOhost. Text book, lectures, and other materials in the course may be used, but are not counted toward the three reference requirement.

Cite all reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) in the paper and list on a reference page in APA style.

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Grading Criteria AssignmentsMaximum Points
Meets or exceeds established assignment criteria40
Demonstrates an understanding of lesson concepts20
Clearly presents well-reasoned ideas and concepts30
Uses proper mechanics, punctuation, sentence structure, and spelling.
10
Total100

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Explanation & Answer

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Attached.

Running Head: RISKS AND RETURNS

Risks and Returns

Course
Professor’s Name
University
Date

2

RISKS AND RETURNS
Risks and Returns

Risk is defined as the potential to lose something that one considers valuable. In business, risk is
defined as the possibility that the value of an asset will not be returned or will be less than
expected. Standalone risk, on the other hand, means the uncertainty that is present in the
expected rate of return on an investment. The quantitative measures are taken usually reflect the
degree of uncertainty. Probability distribution and its relation to risk refer to charts and listings
that indicate all feasible outcomes, for example, the probability of an outcome, the probability
distribution or expected rates of returns.
The expected rate of return can be defined as the anticipated rate of return of an investment given
the current price and future cash incomes. If the investment is set at equilibrium then the
expected rate is equal to the required rate of return.
Continuous probability distribution is one that contains an infinite number of possibilities and is
graphed from −∞ and +∞
Variance is used in probability distribution. It is a measure of the gap between values in a
population. It measures the sum of squared values of how far each number in a distribution
deviates from the mean. Standard deviation, on the other hand, is defined as a measure of
dispersion of population data from the mean.
In business, risk aversion is defined as the actions that people do in order to reduce the
uncertainty in an investment or the hesitation that is present when people cannot agree because
the payoff is not as clear. On the other hand realized return means the payoffs that an investor
gets from an investment, it does not necessarily match the expected return.

RISKS AND RETURNS

3

Risk premium is the surplus returns that an investment in the stock market offers over a risk-free
rate. On the other hand market premium refers to the variation between the expected rate of
return on the market and the risk-free rate.
The capital asset pricing model is one that is used to determine the relationship between expected
return and a risk. It is mainly used in pricing risky securities. It is based on the notion that the
rate of return is equivalent to risk premium plus risk-free rate.
Expected return on a portfolio refers to the weighted average expected pay off of an individual
stock in a portfolio and the weights are only a fraction of the total portfolio. Market portfolio, on
the other hand, is a portfolio which consists of all stocks.
Correlation is considered a statistical measure that shows the extent to which two or more
variables fluctuate together. It is the tendency of two variables to move together. The correlation
coefficient, on the oth...


Anonymous
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